LECT 3

Question 1

What are price takers?

What are price setters?

Why is cost information important?

Answer 1

Price takers = have little control over pricing
Price setters = have some discretion in setting prices

Importance of cost information
- help price takers decide product mix and output

Question 2

Why is pricing important?
4 factors influencing pricing

Answer 2

1. Pricing is important for profit maximisation
2. Factors:
3. Costs
4. Demand
5. Inflation
6. Competitors

Question 3

What is 3 influence of demand and supply?

Answer 3

1. Customers
2. Competitors
3. Costs

Question 4

What is cost plus pricing?
What are two steps?
What are types of cost
- how do you work it out if it
Marginal
Full production
Full cost
What are advantage and disadvantage?

Answer 4

Cost plus pricing = add percentage mark up to cost to determine selling price

Steps
1. Calculate cost per unit
2. Add the desired profit

Types of costs: marginal, full production or full costs
Marginal : add direct materials + direct labour + variable cost /overhead
- mark up for marginal : contribution margin
- look at markup they give you : e.g 150%
Total cost x markup % = answer a
Total cost + answer a = marginal costs

Full production cost
Direct materials + direct labour costs + variable costs + fixed costs ( make sure its per unit )
Markup for full production = gross profit
Total costs x markup % = answer a Total
Total cost + answer a

Full cost plus
Add everything up ( direct labour, materials, variable overheads, admin expenses etc )
Markup =operating profit
Total cost x markup % = answer a Total cost
Total cost + answer a

Advantage : quick and easy ensures all cost are covered

Disadvantage : ignores market conditions

Question 5

What is price elasticity of demand?

What is elastic demand?

What is in elastic demand?

What is formula?

Answer 5

Price elasticy = measures how demand responds to price change

Elastic = demand changes SIGNIFCANTLY with price
Ped is greater than 1

Inelastic = demand does not change much
Ped is lower than 1

Formula : % change in quantity demanded / % chnage in price

% chnage in demand = new quanitity - old quanitity / old price x 100

% chnage in price Per= new price - old price / old price x 100

Question 6

What is formula for find the price?

Answer 6

P=a-bq
1. Find a and b
2. Find b first = change of price/change of demand
3. Find out that answer then times it be Q which is normal quanitty
4. Substitute a with normal price and addit with the answer you times with Q then you found out a answer
5. Then a - b x new quanity they are asking for
Then that is your new answer look at the example on the slide to understand it

Question 7

How do you
1. Establish the linear relationship between price and quanitity demanded
2. Calculate optimum price and output
3. Calculate maximum contribution ]

Answer 7

1. So you basically
2. P = a -bq
   - find b: first price - second price / first quanity - second quanity = answer a
   - find a : pick one price it can be random price = a -answer a x ( one quantity it can be random quanity ) then that answer.
   - you can double check if you put in the other quanity and price you should get the same number!
   - your answer will be p = a ( the number you got from finding a ) - answer a Q

Question 2 : calculate optimum price and output
- basically get the previous answer e.g p = 450-0.3q
Then you get b (0.3) x 2 =0.6
So always remember mr = a-2bq
Basically just doubling b

Then when you have mr you need to workout the mc because
Mr=mc ( mc is variable cost)
Variable cost = mr
Then cancel variable cost from both sides
Then the answer you divided it by b ( we call this answer q )
Then we get answer q ( output )
Then we put it in the original question but the new q we got recently we add it and get the answer it is optimum price.

Workout contribution per unit
SP-VC =
Optimum price from previous answer - variable cost = that is maximum contribution
If we need to find total contribution you do that number you just got x new quanity.

Question 8

How do you do tablor approach if you do not know the function ( 5 steps )
On graph thingy

Answer 8

1. Find total revenue (tr) = price x demand
   Tc = cost per unit x quantity.
2. To workout the total profit you do : tr -tc

3.To workout the marginal revenue ( mr ) = you look at your total revenue number - with the previous total revenue number.

4. To workout marginal cost you do : look at your total cost then minus it with previous total cost.

5.To see the maximum profit you need you need to look at the total profit then see which one has the highest number then that is your maximum profit.

Question 9

What is market penetration pricing?
- when is it suitable?

What is market skimming prices
- when is it suitable

What is product line pricing and example?

What is complementary products pricing?

What is price discrimination?
- conditions

What is volume discounting pricing?

Answer 9

Market penetration pricing:
when products is first launched to see how much sales it would get. Lower prices should encourage bigger demands
-suitable if firm wants to increase market share
- economies of scales

Market skimming pricing
- charging higher prices when a product is first launched and spending money heavily adversiting to gain sales
1. Suitable if the product is new and has little competition
2. Products have short life cycle

Product line pricing
- business sell more than one product instead of focusing on one product. Main aim is just money. For e.g Nike

Complementary product pricing
- one product is sold separately but is normally used with another product

Price discrimination
- sells the same products at different prices in different markets
Conditions
- customer can be segregated into different markets,
- sellers must have degree of monopoly power

Volume discounting pricing
- discounts for bulks purchase to encourage loyalty and clear excess stock